Leasing a car isn’t for everyone.
But it might work for you if you don’t want to stick with the same car for more than a couple years. And if you like the idea of consistently driving a new vehicle that has the latest bells and whistles.
Though you’ll never really own the car, you can generally forget about the cost of maintenance repairs and the monthly payment is cheaper than if you had a loan on the same car.
But leasing can come with certain restrictions and it might not be the best option for you.
Vehicle cost aside, you’ll also want to consider what types of auto insurance you’ll need to buy when leasing. And because you don’t own the car that might change the type of insurance you need.
Here’s how to make sure you get the right coverage when you’re leasing.
How does leasing work?
If you buy a car, you pay for the cost of the vehicle and then it’s yours to keep. You can take out a loan to help cover the expenses. And then pay off the auto loan with monthly payments over several years. The lender officially owns the car until you pay off the loan, at which point it will send you the title.
On the other hand, leasing is more like renting. In exchange for borrowing the vehicle, you agree to pay the dealership the difference between what the car is worth today and what it will be worth when you return it (i.e. the deprecation).
You’ll similarly make monthly payments during the lease. You have the option to buy the car when the lease is up. You also might wind up owing extra money at the end of the lease if you drove more than the agreed-upon miles or the vehicle is in poor condition.
The pros and cons of leasing
There are benefits and drawbacks to consider before signing up for a lease.
On the upside:
- Your monthly payments are often lower with a lease than a loan for the same car.
- You get to have a brand new car that you might not be able to afford to purchase.
- A warranty covers the car during the entire lease.
- There’s no pressure on you to sell the vehicle later.
The drawbacks can include:
- You won’t own the car at the end of the lease and will continually be making monthly payments if you start another lease.
- You’re paying for the period when depreciation is at its highest.
The first year the car loses about 20 percent or more of their original value. Within the first five years you’re paying monthly payments on a car that’s about 60 percent of the original purchase price. And it might not be worth it if you don’t even end up owning the car in the end.
- There’s a chance you may have to pay fees if you need to return the car early.
- You could also have to pay fees if there’s damage that wasn’t caused by normal wear and tear.
If you weigh the pros and cons and decide leasing make sense, you’ll still want to negotiate the vehicle’s current price. After all, if the dealer agrees to a lower current price there will be less of a difference overall and your monthly payments could be lower.
The monthly leasing costs aside, you’ll want to consider what types of auto insurance you’ll need to buy when leasing and how much they’ll cost. And because you don’t own the car, the decision isn’t completely up to you.
Insurance for leased cars
You’ll almost certainly have to purchase liability insurance whether you buy or lease a car. Liability coverage is what protects you in case you hurt someone else or damage their property while you’re driving, and every state has a minimum required coverage amount.
More often than not, the leasing company will require you to pay for more coverage and higher limits. Usually, they require $100,000 of bodily injury liability coverage per person, $300,000 per accident, and $50,000 in property damage liability insurance.
Another requirement might be to buy personal injury protection (PIP), which covers medical expenses, lost wages, and funeral costs for you and your passengers after an accident.
Lessees may have additional car insurance requirements
The lessee could require you to buy other types of insurance as part of the lease agreement:
Comprehensive and collision
Collision covers you in case the car is damaged in a crash. Comprehensive insurance covers damage to your car when it’s not in a collision (such as a fallen tree), and in case someone steals the car. Full coverage is comprehensive and collision combined.
The lessee may have specific requirements for the deductible for these types of insurance. You may also need to buy specific riders, which can make the insurance more expensive.
For example, the lessee might require an original equipment manufacturer (OEM) rider, which means a mechanic or a body shop needs to use parts from the original manufacturer, rather than generic parts, when repairing the car.
New cars quickly depreciate, and there could be a difference between the current value of the vehicle and the amount you still owe the lessee. This “gap” can become an issue if the vehicle is declared a total loss or stolen as insurance might cover the current value of the car, but not the gap.
Gap insurance might be optional, but some lessees automatically add the insurance to your lease and include the premiums in your lease payments or charge you a one-time fee when the lease starts.
Because the lessee still legally owns the vehicle, you may need to name the company as an additional insured party and as the loss payee. If the car is damaged beyond repair or stolen, the insurance company can now pay the lessee directly.
Additionally, the insurance company will notify the lessee if you change your coverage, cancel your insurance policy or are late with a premium payment.
Your insurance could be lower if you buy the same vehicle
If you choose to buy a car rather than lease a vehicle you’ll still need to comply with your state’s minimum insurance requirements. However, you could have more control over the amount of coverage you buy and whether you want to purchase additional coverage.
Each of these choices can impact your cost of insurance. For example, a higher deductible (the amount you need to pay before your insurance kicks in) leads to lower premiums. The lessee might dictate how high of a deductible you’re allowed to have even if you’d rather have a higher deductible and lower payments.
Keep in mind, if you take out an auto loan to purchase a car, the lender may have similar requirements as a lessee.
Tips for lowering your insurance even if you lease
It can seem like you’re stuck at the lessee’s whim for the type and amount of car insurance you’ll need to buy. While this is partially true, you still control many of the factors that influence your rates and can find ways to lower your costs. For example, the lessee doesn’t say which insurance company you need to choose or whether you can qualify for discounts.
Here are two simple ways to potentially save money on your car insurance:
- Don’t assume your current insurer, or the insurance company that your friend or relative recommends, is the least expensive option. Shopping for insurance can be simple and you can switch insurers at any time.
- Bundling insurance often leads to a discount. You can do this by buying your car insurance from the same company you use for renters or homeowners insurance.
Insurance companies won’t give you the discounts you’re eligible for unless they know you qualify. So, be sure to contact your insurer and ask about additional savings opportunities and tell them about significant changes in your life. If you change jobs and are driving less, get married or install anti-theft devices in your car, that could all lead to savings.